THE
LEGAL BASIS FOR THE SECURITIES MARKET IN THE REPUBLIC OF KAZAKHSTAN

Legal support for the securities
market falls within the state's activities in a person of its agencies for the
purpose of enacting relevant legislation creating the necessary conditions
under which securities can circulate in the most effective and appropriate
manner. The state interests can thereby correspond to the needs of the public to
the maximum extent, according to the objective economic laws for the
development of any market-oriented society. In our case, the term «legislation»
(zakonodatel'stvo) includes all the laws of the Republic of Kazakhstan,
Presidential Edicts, and Decrees of the Kazakhstani Government, as well as any
other normative legal acts enacted by the National Securities Commission and
other national executive bodies within their authorities. When dealing with
legal support for the securities market first, we need to specify that such a
market is understood as a field where certain pecuniary debt obligations,
rights of participation in capital and management circulate (i.e., are
sold and purchased) with respect to business entities set up in specific
organizational and legal forms. The aforementioned types of property rights in
the securities market are certified by a special type of documents called
securities, or by other methods certifying property rights established by law
(e.g., non-documentary securities).

As they are basically a form of
certain civil law relations, not all types of securities may circulate in the
securities market. In particular, mortgage certificates, bills of lading, and
other types of commodity instructional documents recognized by Kazakhstani law,
circulate in the commodity markets, including a commodity exchange. In its
turn, the securities market, being an element of the financial market, includes
the following types:

- the capital market, where
stocks and bonds are sold and purchased and where other obligations circulate
relating to the attraction of funds for setting up enterprises and developing
business activities, as well as for solving national or local (oblast')
economic, social and cultural problems; and

In this article, we will research
the issue of legal support for capital and money markets in the Republic of
Kazakhstan.

1.
Development of Securities Legislation in Kazakhstan

Until recently In Kazakhstan,
there was were no securities market as such. However, civil legislation had
always admitted that securities could circulate in this country. But, in fact,
no economic prerequisites for securities circulation existed in Kazakhstan.
Under the Soviet regime, there was no need for securities circulation in the
internal market. Only with market-type reforms in the Republic the issue of
establishing a securities market emerge. It was at this time that Kazakhstani
economists, lawyers, and legislators turned not only to the modern experience
of developed economies but also to their own legacy with respect to regulating
the processes of securities circulation.

Kazakhstani securities
legislation has grown on the basis of the norms of Russian civil (commercial)
law, and by now, it has overcome a number of phases in its development. Before
the 1917 socialist revolution, Kazakhstan was a part of the Russian Empire, and
civil and commercial (trade) relationships during the course of 18th and 19th
centuries were, therefore, regulated by the norms of Russian commercial law. We
should also keep in mind that no securities market had ever existed in
Kazakhstan due to the lack of the necessary economic conditions: historically,
the Republic's economy had been basically stock-breeding-oriented and, normaly
as a rule, was based on barter transactions.

After October 1917 (that is,
after the 1917 socialist revolution), during the first decades of Soviet power,
such relations were regulated by the RSFSR's civil legislation. During that
period, NEP (New Economic Policy) legislation created the most viable legal
basis for securities circulation. We would like to emphasize that under «securities
circulation», we have in mind the money market where bills and checks were used
as a means of payment in actual trade transactions, as well as the commodity
market as a sphere where commodity papers (e.g., warehouse certificates)
circulated. That legislation, inter alia, was comprised of the following
basic acts:

- the Statute on Bills of
Exchange and Promissory Notes approved by TsIK and SNK of the RSFSR, 7 August
1937[2];

- the Statute on Checks approved
by TsIK and SNK of the RSFSR, 6 November 1929[3]; and

- several other normative acts.

During that period, notes and
checks were the most popular types of securities which were used as a means of
payment during the course of trade transactions. In addition, warehouse and
pledge certificates were used in transactions relating to the storage of goods,
real estate sales and purchases, etc. Legislation provided a general definition
of securities, as well as indicating various types of securities and
establishing fundamental rules for transferring and exercising property rights
certified by respective types of securities. However, the circulation of such
instruments did not create a securities market per se, which could have
helped to attract financial resources for production purposes and to
redistribute such resources, promoting the development of the national economy.
No mechanisms existed which could be used for issuing and circulating
investment securities (the stocks and bonds of legal entities); furthermore,
there was no legal basis for stock exchange transactions or the activities of
professional traders (dealers) and intermediaries (brokers) in the securities
market, as the latter were considered to be elements which were alien to the
ideas of proletarian socialism and communism.

Later on, the development of
legislation based on the Principles of Civil Legislation of the USSR and Union
Republics of 1961[4] resulted in terminating any
circulation of securities in the «internal market» of the former USSR,
including Kazakhstan. The USSR Constitutions of 1936 and 1977 prohibited
private ownership and did not provide for entrepreneurial freedom, which
automatically excluded the possibility (and, in fact, even the right) to set up
joint-stock companies, economic partnerships and partnerships that could issue
circulating stocks and bonds. As far as government securities were concerned,
government bonds were issued «within» the country, which were in fact called
securities. However, such bonds did not circulate (circulation would have been
meaningless anyway) «within» the country, as there were no incentives by which
to encourage such a «play» as regards those securities: the government was
interested in attracting money, whereas the people were only concerned with
receiving their interests and being awarded with prize money. And the only
possibility of deriving profits as a result of purchases and sales of
government bonds was alien to the ideas of building communism. Moreover, one of
the basic principles of civil law was often violated, namely the freedom of
contract, when told securities were imposed on the people, for example as a
part of their wages. At the same time, securities were considered to be objects
of civil rights and civil transactions. For instance, according to Article 128
of the 1963 Civil Code of the Kazakh SSR,[5] payment documents
(notes and checks) and stock exchange valuables (shares and bonds) denominated
in foreign currencies were allowed to circulate within certain limits
established by the USSR's laws. According to Article 126 of the 1963 Kazakh
Civil Code, within the process of commodity circulation, bills of lading and
other commodity instruction documents could be used.

Here, we should remember that the
absence of any market infrastructure in the former Soviet Union discouraged
foreign issuers from attracting Soviet investors' funds using securities for
this purpose. This situation resulted in a zero-level circulation of foreign
securities on the territory of the Soviet Union.

It is worth mentioning that
notes, checks, and other instruments were also actively used in Soviet foreign
trade transactions as a means of payment. In particular, this may be confirmed
by the fact that in 1936 the Soviet Union signed the 1930 International
Convention that established the Uniform Law on Bills of Exchange and Promissory
Notes. The Convention was made effective in the Soviet Union after the entering
into force of the 1937 TsIK and SNK Decree on the Enactment of
the Regulation on Bills of Exchange and Promissory Notes. That Decree remained
effective until the Soviet Union broke up and Kazakhstan became a sovereign
state. As it was already mentioned, checks were circulated on the territory of
the Soviet Union on the basis of the 1929 Statute on Checks.

The ideas of perestroika
resulted in an awareness of the need to discover some methods by which to
increase the effectiveness of activities, using additional (or alternative)
sources for generation finance as well as for creating incentives for people to
become involved in independent business entrepreneurial activities or in
investing their personal savings in such a way that could guarantee a certain
degree of their safe-keeping and growth. It was at that moment that securities
and other forms of business
activities involving including securities were reanimated as a
vehicle to attract money subject to various conditions in order to establish
and/or develop business activities. This stage was marked by the USSR Cabinet
of Ministers' Decree of 19 June 1990, approving the Statute on Securities and
then, on 31 May 1991, by the new Principles of Civil Legislation of the USSR
and the Union Republics,[6]one of the chapters of
this latter document dealing exclusively with the concept and types of
securities, as well as establishing basic principles for the transfer of
securities and the enforcement of property rights fixed in such securities. The
above-mentioned Principles remained valid concerning the part covering issues
relating to securities until the moment when the new Kazakhstan Civil Code was
adopted, which was confirmed by the Enactment on Regulating Civil and Legal
Relations During the Period of Economic Reform, enacted by the Kazakhstan
Supreme Soviet on 30 January 1993.[7]

In Kazakhstan, as as during the
above period (1990 to the beginning of 1994), a certain legal basis was
established which made it possible to issue securities and to trade them in a
number of markets. In addition to the said Principles of Civil Legislation,
such a legal basis was comprised of the following legal acts:

- the Law of the Republic of
Kazakhstan on Economic Partnerships and Joint-Stock Companies of 21 June 1991,[8]
which authorized the formation of joint-stock companies, partnerships in
commendam and limited liability partnerships, which were raising (or, at least,
were authorized to raise) funds for their activities by issuing shares and
bonds;

- the Law of the Republic of
Kazakhstan on Securities Circulation and the Stock Exchange, dated 11 June
1991,[9] regulating the following matters: the
issuing of securities, the registration of such issues, licensing intermediary
activities in the securities market, and the formation and operation of the
stock exchange;

- Statute on Securities approved
by a Kazakh Cabinet of Ministers' Decree No. 701 of 13 November 1991, a Statute
which defined all the relevant types of securities and the necessary
particulars relating to each type;

- other normative legal acts
defining the procedures for the following: issuing government securities; state
registration of securities issued by legal entities; licensing intermediary
activities in the securities market, etc., which were based on the said laws;

- a number of legal acts and
sub-laws paving the way for deregulation and privatization (including
corporatization as a method of conducting these two processes) and regulating
the acquisition of privatized entities' share packages by privatization
investment funds;

- certain normative legal acts
issued by the National Bank of Kazakhstan which regulated the issue and
circulation of notes, bank (deposit) certificates; These acts are valid for all
banking activities and banking services.

During that period, shares were
issued by joint-stock companies, including such companies formed as a result of
privatization, stock and stock/ commodity exchanges were set up, and local
governmental agencies attempted to issue their own securities. So-called
professional participants also appeared in the securities market. Although
existing after that securities market was not perfect, the notion of forming a
securities market in Kazakhstan was no longer at a complete standstill; the
application of those legal acts helped to accumulate and, to a certain extent,
to rethink the country's own experience in this field.

One of the results of this
experience was an awareness of the fact that the operation of the capital
market as an element of the securities market was somehow counterbalancing the
banking sector. Given a reasonable government policy, both of these two sectors
- while being parallel to, though relatively independent of each other - are
mechanisms used for investing in the economy and for redistributing the
investments. In the event that one of the two becomes subject to a crisis,
another which continue to function, would not allow this crisis to paralyze the
national economy as a whole and would even contribute to the other sector's
accelerated recovery.

Another important «lesson» was an
understanding the state's multiple role in the securities market in which it
may simultaneously act as an issuer of government securities, an investor and player
carrying out the functions of state regulation and control as regarding
securities market relations. In this case, the state is represented by its
various agencies. The reason for this is that the same one person may not
participate in a «game» along with its other participants, at the same time
establishing the rules for itself and those other participants. Under such
circumstances, two negative aspects must be considered: on the one hand, the
state, acting in its own interests, may infringe upon the other participants'
legitimate rights and, on the other hand, like any other participant, the state
needs to ensure the protection of its own legitimate interests.

In this connection, on 20 March
1994, the President of the Republic of Kazakhstan issued an Edict «on Measures
to Form the Securities Market»,[10]which
symbolized a new stage of state regulation of the securities market and securities
legislation. With this Edict, the Statute «On the National Securities
Commission» was approved, a Commission which was defined as a governmental
agency regulating securities market relations and exercising control thereover.

The principal functions of this
agency were defined as following:

- licensing professional
activities in the securities market,

- registration of
non-governmental issues of securities,

- enacting normative legal acts
regulating relations in that market,

- control over the observance of
laws by all market participants,

- measures directed at the
protection of the participants' interests,

- state support for the formation
and development of the market infrastructure, etc.

Thus, the above Edict issued by
the President of Kazakhstan, recognized the significance of the securities
market for the national economy and the special status of the state in this
market; it also confirmed the need to provide for the state regulation of
capital market relations and the fact that the securities market - falling
within the sphere of redistribution of ownership, property and political
interests - should be relatively independent.

However, the Edict also had a
negative effect. This legal act repealed the 1991 Law of the Republic of
Kazakhstan on Securities Circulation and the Stock Exchange and Regulation on
Securities. In fact, during a six-month period in 1994, the Kazakhstani
securities market did not have an appropriate legal basis. All steps taken by
government agencies in connection with licensing intermediary activities in the
securities market and in registering the issue of securities could be appealed
at any time, although it was impossible to substantiate such steps by relying
on legislation. Fortunately, nothing serious happened in those days, but it did
establish undesirable practices according to which governmental agencies could
assert any rights and authorities in order to regulate the market sphere. Only
on 3 October 1994 did the Kazak Cabinet of Ministers issue its Decree No. 1099
approving an Interim Statute on Securities Issuance and Circulation and the
Stock Exchange and the Interim Regulation on Securities[11].

The above Interim Statutes filled
a gap in the legal regulation of securities relations, the registration of the
securities issue, licensing certain professional activities in the securities
market, stock exchange formation and operation. In addition, the basic types of
securities and their obligatory requisites were provided in the Statutes. The
adoption and application of this Statute mark a notable stage in the
development of the legal basis on which the Kazakhstani securities market
rests. This stage lasted until April 1995. The appointment by the Republic's
President of the first Chairperson, the other first four members of the
National Securities Commission and the formation of the Commission's executive
body in January 1995 was an important landmark on that stage. It was at that
time when the National Commission began to perform its functions and to
exercise the powers delegated thereto.

On 27 December 1994, the
Kazakhstani Civil Code (the General Part)[12](the
CC) was adopted, which formed the basis for the current legislative regulation
of the Kazakhstani securities market. Since April 1995, a new stage in the
development of the market itself has commenced. From the very beginning, this
stage was marked by the adoption of a fundamental normative legal act,
regulating securities market relations in Kazakhstan, and an inauguration of
the Central Asia Stock Exchange in Almaty.

2. Existing Kazakhstani
Securities Legislation

The existing legal basis rests on
the norms of the 1995 Constitution of the Republic of Kazakhstan, which
guarantee the recognition and equal protection of state and private property
and citizens' rights to own any legally- acquired property, as well as
entrepreneurial freedom and the prohibition of fraudulent competition.

On the basis of principles
contained in the CC as adopted on 27 December 1994, securities as a type of
property rights are recognized as objects of civil rights destined for free
circulation, ownership rights being among them. Paragraph 2 of Chapter 3 of the
CC consolidates the legal definition of securities, enumerates and describes
the types of securities, classifies them in accordance with their different
legal basis, establishes the requirements for securities and the principles for
transferring rights to securities, regulates the execution of securities as
well as the renewal of rights e.g., to lost bearer securities. It is
necessary to mention that, in regulating securities, the CC is directed towards
the circulation of material objects. That means that securities, determined as
documents, are recognized as the object of material rights; as regards to their
circulation, they are subordinated to the regime of goods. At the same time,
the CC states that the securities market is, in essence, the sphere of
circulating the property rights (financial obligations). Here, the Code takes
into account the experience of developed financial markets where securities
actually do not circulate according to the traditional understanding of
Kazakhstani legislation; rather, dematerialized securities - that represent financial
obligations of the issuers of investment securities - serve as the
subject-matter of transactions. In this connection, in Article 135 the CC
provides for the opportunity to issue so-called non-documentary securities,
where the relevant property rights are certified only by a record kept in books
or computerized registers instead of securities in their more traditional
embodiment as a such. This Article in the CC serves as the basis for
establishing and developing a modern securities market infrastructure in
Kazakhstan oriented towards the world financial markets.

In accordance with the norms of
the CC and on the basis of additional power delegated thereby to the President
of the Republic of Kazakhstan, some Edicts having the force of a Law have been
promulgated which in correlation with the CC, constituted (or currently
constitute) the legal basis of the securities market functioning in Kazakhstan.
Among those acts are the following:

- An Edict of the President of
the Republic of Kazakhstan having the force of a Law «On Securities and Stock
Exchange» of 21 April 1995, No. 2227[13]. This Edict was aimed
at the establishment of compulsory requirements with respect to the state
registration of non-state securities issues, the procedure and the maturity of
their distribution, and general conditions for maintaining a shareholders'
register. The determination of the status of the National Commission on
Securities as the authorized state body regulating the relationship of the securities
market of Kazakhstan was at a crucial moment. The Edict paid special attention
to define the main types of professional activities on the securities market,
regulating the conditions for the licensing and implementation thereof, and
determining the procedure for the registration of securities transactions.
Furthermore the Edict: (a) reflected the procedure for the establishment and
operation of the stock exchange, (b) provided an opportunity to form other
types of organized securities markets (for example, the automated quotation
systems an the extra-exchange securities market), and (c) established the right
of professional participants in the securities markets to unite in
non-commercial institutions, representing the joint interests of the participants
thereof. The Law «On Securities Market» of 5 March 1997[14] later
repealed this Edict.

- An Edict of the President of
the Republic of Kazakhstan having the force of a Law «On Business Partnerships»
of 2 May 1995, No. 2255[15]. This act secured the legal
opportunity for business entities to attract funds with the aim of creating and
developing businesses by using the mechanism of issuing types of securities
such as stocks (exclusively by joint-stock companies) and bonds (by joint stock
companies as well as by limited liability partnerships).

- An Edict of the President of
the Republic of Kazakhstan having the force of a Law «On the National Bank of
the Republic of Kazakhstan» of 30 March 1995, No. 2155[16]. Under
this Edict, the National Bank of Kazakhstan is entitled to issue securities
that are state securities and also therefor bears liability.

- An Edict of the President of
the Republic of Kazakhstan having the force of a Law «On Banks and Banking
Activity in the Republic of Kazakhstan» of 31 August 1995, No. 2444[17].This edict provides the issuance of
shares by second-level banks; specifically referred to banking operations
relating to securities transactions such as discounting the liabilities of
natural persons and legal entities, safe operations relating to keeping of
securities, the issuance of securities other than shares of stock (bonds,
deposit certificates, promissory notes), and mediation in the securities market
in the event of obtaining the relevant license.

- An Edict of the President of
the Republic of Kazakhstan having the force of a Law «On Taxes and Other
Compulsory Payments to the Budget» of 24 April 1995, No. 2235[18].
(Later on this Edict has been re-named as the Law of the Republic of Kazakhstan
«On Taxes and Other Compulsory Payments to the Budget» pursuant to the Law of
the Republic of Kazakhstan No. 440 dated 16 July 1999). A number of articles in
this Edict have been dedicated to the regulation of taxing securities
transactions. In particular, the procedure and the amount of fees for the state
registration of non-state securities issue as well as taxes payable on
securities transactions are regulated. Currently, in accordance with amendments
introduced in December 1997, the tax on securities transactions has been
cancelled, although fees on registration of securities issues are still
applicable.

- An Edict of the President
Republic of Kazakhstan having the force of the Law «On Privatization» of 23
December 1995, No. 2721[19] recognizes that joint-stock
companies' shares that are in state ownership are subject to privatization; the
conditions and procedure for the privatization of state- owned shares are
currently being established.

- An Edict of the President of
the Republic of Kazakhstan having the force of the Law «On Licensing» of 17
April 1995, No. 2200[20]. (Later this Edict has been re-named
as the Law of the Republic of Kazakhstan «On Licensing» pursuant to the Law of
the Republic of Kazakhstan No. 471 dated 8 October 1999). This legislation
establishes that professional activities on the securities markets, the
organizators of offers for securities (the stock exchange, the extra-exchange
quotation system) as well as self- regulating organizations of professional
participants of the securities markets are subjects to compulsory licensing.

On the basis of the above, a
number of stock exchanges have been established and more respectable brokerage
and dealer offices have appeared, currently participating in transactions with
state packages of shares, as well as other types of state securities. In
addition, the state registration of the shares of most joint-stock companies
has taken place operating in Kazakhstan; a rather wide range of individuals
have received qualification certificates as securities experts, and first
registeried companies are now being established. There are already serious
disputes (including judicial proceedings) as a result of activities on the
securities market.

The stage of development of
Kazakhstani securities legislation which we have examined so is, however, not
complete. The process of forming the legal basis for the operation of the
securities market in Kazakhstan goes on. The infrastructure of the market
itself is now at the formation stage. In 1997- 1998, the legislation was
amended and improved by the adoption of a number of crucial laws, among them:

- The Law «On Securities Market»
of 5 March 1997. Actually, the concepts of this Law do not vary significantly
from the concepts of the aforementioned Presidential Edict «On Securities and
Stock Exchange» with the exception that the National Commission on Securities
has been finally determined as a state directly subordinated body and reporting
to the President of the Republic of Kazakhstan. So, legally speaking, the
triple role of the State concerning the securities market has been recognized.
With the adoption of the Law, the National Commission has an opportunity to
exert legal influence on the Government and the National Bank of Kazakhstan
with respect to the issuance and distribution of state securities and the
investment of state funds in securities of other share issuers. Regretfully, in
practice the National Commission has not yet implemented its mission in full,
which it is justified more by political reasons than legal ones. Concerning all
other aspects, the Law has basically improved the norms of previous existing
legislation. Thus, investors are now classified more reasonably as individuals
and institutional, the institution of nominal holding of securities has been
introduced, stricter requirements for professional participants of the market
(financial status, qualifications, disclosure of information on the activity
thereof, compliance with the norms of business ethics) have been established, a
definition of organized securities markets, uniting stock exchanges and
extra-exchange quotation, and trading systems has been introduced, and the
establishment of self- regulating organizations of professional participants in
the securities markets has been regulated.

- The Law «On Registration of
Securities Transactions in the Republic of Kazakhstan» of 5 March 1997[21] regulates the activities of nominal
holders of securities - a specific category of brokers-dealers, custodians and
the Central Depositary - as well as registrars with respect to maintenance of
registers of holders of securities. The Law has determined the principles of
nominal holding of securities and the registration of transactions with
securities, and has also set forth the functions of nominal holders.

- The Law «On Investment Funds in
the Republic of Kazakhstan» of 6 March 1997[22]
regulates the issues of investment funds and the activities thereof as regards
the investment of funds attracted from mass investors in the securities of
specific categories of share issuers. Unfortunately, the actual situation in
the economy of the Republic, some obstacles to the adoption of crucial
Government decrees, and other factors have not allowed for the practical implementation
of this Law in full. The main deterrents are uncertainty on the part of
investors as regards the domestic market and the reliability of its
infrastructure, as well as insufficient investment opportunities - reliable and
profitable securities in which funds may be invested.

- The Law of the Republic of
Kazakhstan «On Joint Stock Companies» of 10 July 1998[23] has
repealed a number of Articles of the 1995 Presidential Edict «On Business
Partnerships», insofar as they relate to joint-stock companies. The 1998 Law
regulates (in more detail) issues Parlamenta of the establishment and
activities of joint-stock companies, transactions concerning the shares of
these companies, the criteria and conditions for large-scale transactions; it
also determines the structure of corporate management and the procedure for the
establishment of corporate bodies and thereof the adoption of resolutions.
There are new provisions relating to the structure of charter capital and the
registration of a company' s share issuance. In addition, although this Law is
generally regarded as a very progressive one, some of its norms need
improvement; this is especially true with regard to those provisions relating
to the protection of shareholders' interests as a whole, and minority
shareholders in particular. Issues such as providing for the founders'
interests upon establishment of a company and the regulation of relations
between shareholders are also in need of improvement. It is necessary to widen
the classes of companies' shares in order to more adequately meet the various
interests of shareholders and joint-stock companies as such, as well as to
regulate in detail the issue of making, executing, and securing the
implementation of shareholders' agreements as an instrument for determining the
relations between the investors.

- There are some other
legislative acts, among them the laws regulating specific aspects of the
issuance and circulation of securities and the powers of the National
Commission on Securities. For example, the Law «On Currency Regulation» of 24
December 1996[24], where the National Commission has
been determined as the body responsible for currency regulation, establishes in
particular the procedure by which foreign securities can have access to the
domestic markets. The Law «On External Borrowing and Management of External
Debt» of 10 April 1997[25] and then the 1999 Law «On State
Borrowing and Debt and Borrowing and Debt Guaranteed by the State»[26] which later repealed the previous
one provide the state and non-state external borrowing in the form of issuing
of debt securities, which allows, in particular, the Kazakhstani Government and
large national banks and companies to enter the Euro-securities market.

It is necessary to mention, among
others, the following normative legal acts:

- decrees of the Government of
the Republic of Kazakhstan, under which a number of provisions regulating
various aspects of the securities market in Kazakhstan have been adopted (for
example, licensing and conducting professional activities);

- acts of the National Commission
on Securities establishing the norms for conducting activities on the
securities market. In particular, the National Commission - by virtue of the
provisions of existing legislation - regulates the conditions and procedure for
the state registration of share and bond issues, the distribution of issues,
various aspects of the access of foreign share issuers' securities for
circulation in domestic markets, the determination of qualification of experts,
etc;

- acts of other central executive
bodies on the issues of securities circulation. For example, acts of the Ministry
of Finance of the Republic of Kazakhstan, enacted with respect to aspects of
state securities issuance and circulation.

3. The Demand for the
Development of a Legal Basis for Regulating Relations in the Securities Market
in Kazakhstan

The development of legislation in
the securities market in Kazakhstan is based on the following major needs of
this market:

- Establishment of conditions
stimulating the wish of business entities to issue securities for circulation.
This is the macoeconomic aim that depends - to a great degree - on the general
economic policy of the State leading investors, in turn, to feel sufficiently
confident to invest their funds in securities and share issuers to have
confidence in the strength of their business and the perspectives for its
development.

- Improvement of the system for
protecting the rights and legal interests of individuals investing their own
funds in the securities of shareissuers (that is, the investors). In
addition to the achievement of macroeconomic aims, it is reasonable to
establish a system for the insurance of private investors' contributions into
securities, to secure and introduce a more effective system for informing
investors concerning the status of the stock market, and to ensure the
formation of an institution of investment advisors and some other measures.

- There is a necessity to develop
a fluid system for regulating relations which are quickly developing on the
securities markets. This is so to ensure the creation of the necessary
conditions for effective regulation, including supervision, of professional
activities on the securities market. It is also necessary to ensure the more
rapid maturity of self-regulating organizations of professional participants in
the securities markets in order for them to provide primary regulatory
functions as regards to the securities markets, while the state will retain
supervision, monitoring, and licensing functions.

(4) Practical activities
(including the application of legislation) stipulate the necessity to implement
the following basic measures targeted towards improving specific aspects of the
legal basis of the securities market in Kazakhstan.

*
* *

How to stimulate share issuers to
issue securities? The response to this question depends on the interest of the
State in the role of the securities market in the formation and development of
civilized market relations, and on the degree to which it has realized the
possibility of creating a balanced system of correlation between banking and
the securities market. This is of importance to be able to allow a
redistribution of part of investment activity in order to react effectively and
quickly to any «breaks» in the mechanism of crediting business activity,
thereby hopefully avoiding serious economic crises. The existence of
legislation relating to securities and joint- stock companies, the activities
of the National Commission on Securities, and the approval of Governmental
programs for the development of the securities market underline the intention
of the Government to establish an effective and efficient infrastructure for
the stock market in Kazakhstan. As long as the existence of the securities
market is impossible without securities as such, it goes almost without saying
that it is crucial to stimulate the issuance of shares and bonds of legal
entities. The core of such stimulation rests on a differential approach to the
provision of state registration as regards to issues of non-state securities.
At first, it is necessary to establish stricter rules for the provision and
publication of information on securities issuance intended for open
distribution and compulsory publication of reports on the distribution of
issue. On the other hand, it seems reasonable to establish clearly formed
privileges for securities issues distributed by close method and shares of
close joint-stock companies, as well as to foresee mechanisms of differential
conditions for the participation of shareholders in the capital of companies,
through the introduction of various classes of shares and the entering into
shareholders' agreements.

The core factor supporting the
interest in issuing securities is an opportunity to possibly completely
distribute issued securities under conditions which are acceptable to the share
issuer. In order to achieve this aim it is necessary to develop institutions of
underwriters and distributors providing professional services as regards to
distribution of issue, as well as to establish a well organized market where
share issuers themselves can distribute significant volumes of issued
securities among institutional investors (investment and pension funds,
insurance companies, etc.).

The achievement of these purposes
depends on the existence of relevant legal norms regulating specific aspects
and the effectiveness of those measures undertaken by the Government and the
National Commission on Securities with the aim of supporting share issuers.

The development of
scientific-technical thought, as well as the development of relations on the
Kazakhstani market require the utilization of new progressive forms of
securities issuance, and an understanding of the differences in the circulation
of various types of securities and the clashing interests of various state
bodies regulating any aspects connected with securities. In this respect it is
necessary to take measures to clarify the definition of securities, and the
establishment of a correct - from a legal point of view - definition of
dematerialized securities either as personal financial liability or as a form of
confirmation of the share issuer's liabilities.

It is also crucial to separate,
if we may say so, «individual» securities from securities that are the subject
to mass issue (issuing securities). The former are securities that are issued
under specific conditions (maturity, value, etc.) and with a specific basis for
each of them. Here we have the commercial promissory notes, checks, bills of
lading, mortgage certificates, etc., that circulate in monetary or commodity
markets. Securities of the second category are shares, bonds of legal entities,
treasury bills, state savings bonds, etc., issued in a series, distributed and
circulating under conditions which are equal for each issue. Such separation is
essential as long as a significant difference exists in the regulation of the
issuance of different categories of securities, in particular concerning
aspects of state registration, distribution, circulation spheres, etc.

Among issuing securities it is
also necessary to specify corporate securities (shares and bonds of legal
entities) issued in order to attract capital for the establishment and
development of business and state securities issued and limited to domestic
state debt for the settlement of economic, social and other aims of state
importance. Here we need to distinguish securities of local executive bodies.
The peculiarities of the issuance serve as the basis for such a classification.
In addition, the legal allocation of the aforementioned categories will help in
a clearer separation of the functions of the National Commission of the
Republic of Kazakhstan on Securities, the National Bank of the Republic of
Kazakhstan and the Government of the Republic of Kazakhstan concerning the
regulation of securities circulation.

One more important factor forms the
ground for the existence of securities market: the presence of investors - are
entities that are ready to invest money in securities. The extent of such a
readiness to invest will depend on an awareness on the part of investors of the
reliability of these securities that is based on the liquidity and
profitability of securities. As long as the free market supposes a freedom in
decision making with respect to investment (or any other methods of protecting
anybody's funds), legislation shall clearly stipulate the notion of the
personal responsibility of the investor as regards to the investment decision
taken, and that means that after the acquisition of securities the investor
shall bear the risk of not attaining what he expected to get. But, anyway, the investor
will get all the necessary information that will assist him in making a
definite decision. At the same time, it is necessary to establish an effective
system for protecting the investor's interests as we already have experience of
individuals readily trusting idle and groundless promises of profit and the
return of invested funds. Elements of the aforementioned system already exist
in Kazakhstani practice, such as state registration of issues, the requirement
of compulsory provision for the approval of a report on issue distribution, and
the compulsory publication of the issue prospectus. However, this is not
enough. More important measures in this direction must be the following:

- toughening the requirements
with regards to share issuers on ensuring the access of investors to essential
documents and first of all to issue a prospectus;

- establishment of a system for
insuring contributions in securities, including an insurance fund established
by investors and professional participants, mechanisms for the insurance of
investments in securities, control over its implementation and an analysis of
the reasons for a loss of contributions;

- improvement of the institution
of nominal securities' holders, aimed at ensuring the professional execution of
the orders of clients thereof with respect to securities transactions and
safeguarding client's rights as regards to securities transferred for nominal
holding, as well as to ensure the confidentiality of information on clients and
securities;

- improvement of the process for
the establishment and activities of institutional investors in the securities
markets providing mediated investment activity of share issuers and increasing
the degree of reliability of investment in securities by diversifying attracted
funds.

The establishment of a mobile
system for regulating the rapidly developing relations on the securities market
consists of broadening the authority of the National Commission on Securities
to issue normative legal acts concerning the regulation of relations in the
domestic securities market. In addition, considering the necessity to ensure
free market development it seems reasonable to accept the creation of so-called
self-regulating organizations of professional participants of the securities
markets. The main aim of this type of organization is that professionals can
establish organized markets like the stock exchange and quotation systems of
the extra-exchange securities market and thereby independently set rules for
trade on these markets on the basis of legislation. Such a flexible system
helps in reacting positively to the necessities of the market participants and
ensures mobility in the regulation of bid procedures.

It seems to be logical for the
development of self-regulating organizations, as well as the development and
strengthening of the correlation thereof with the National Commission on
Securities, to transfer the primary stage of licensing and control over the
activities of professional traders and mediators on the securities markets to
such self-regulating organizations themsleves, which will make the regulation
of relevant relations more effective.

An important and essential step
in the development of legislation concerning the securities market is an
improvement in the legislative acts regulating the aspects of establishment and
functioning of the infrastructure of this market. This is particularly so as
regards to elements as securities depository, custodians, registrars, etc. All
these elements in correlation with each other are aimed to implement the system
of the so-called «internal» control of the securities market. Under such a
system the elements in correlation with each other mutually control each
other's activities and effectively prevent illegal behavior.

«External» control of the
securities market is a state regulation and control by the National Commission
on Securities and other state bodies (tax, judicial bodies, etc.). A correct
determination of all these bodies' powers concerning the activities thereof as
regards to the regulation of the securities market and its activities is
essential. That means that the state, as far as the securities market is
concerned, is presented as:

- the regulating body in the form
of the National Commission on Securities in the capital markets and the
National Bank on the monetary markets;

- the share issuer of state
securities in the form of the Government and the National Bank;

- an investor acquiring, for
example, states packages of shares.

As long as the state is presented
in its different roles it cannot, as a participant on the securities market,
regulate itself, because that would be unfair in relation to other
participants. At the same time, the state equally needs to be protected with
them. That is why the issue of support and development of the status of the
National Commission on Securities which will ensure its independence from the
Government and effectively allow it to regulate activity in the securities
market and to protect the legal interests of its investors and other
participants currently is still very important.

Печатается по: Maidan K.
Suleimenov., Farkhad S. Karagoussov. The legal basis for the securities market
in the Republic of Kazakhstan. // Review of Central and East European Law.
1998. Nos.5/6. P. 451-468.